South Africa is home to more HIV-positive people than any other country in the world. This is a developmental disaster, yet our understanding of the economic impact of the AIDS pandemic is sketchy at best. Macroeconomic modellers are divided over whether the overall impact of the epidemic will be to raise or lower per capita GDP, and there are no studies of the impact of AIDS on income distribution.

This paper provides a critical overview of recent macro-economic research on the impact of AIDS in South Africa. It is not a comprehensive bibliographic review (as in CADRE 2000a and 2000b), but rather a selective analysis of recent and important pieces of economic research. The key objective is to explain, in an accessible manner, how different macroeconomic models arrive at different results and to point to the limitations of these models - in particular, their failure to take into account the dynamic adjustments suggested by firm-level studies.

It is argued that the recent sharp decline in the cost of antiretroviral medication will probably result in more firms providing such medication to their workers (particularly skilled workers). If so, then the economic impact of AIDS will be less substantial than that projected by the main macroeconomic models. However, the distributional implications are unsettling.